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What Drives Applied Materials’ Semiconductor Systems Earnings?

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Factors driving demand for semiconductor systems

Applied Materials (AMAT) is witnessing high growth as the semiconductor industry undergoes a multiyear inflection. Applied Materials chief financial officer Robert Halliday stated that the semiconductor industry is becoming larger and more diverse as the emergence of the IoT (Internet of Things), cloud data centers, AR/VR (augmented/virtual reality), and AI (artificial intelligence) is driving demand for silicon-rich devices.

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All of these devices are data driven, which “translates to higher demand for logic and memory capacity at both the leading edge and trailing geometries,” according to Halliday. Applied Materials has revised its guidance for WFE (wafer fabrication equipment) spending in 2017 from $36.8 billion to over $40 billion. The company expects WFE spending to remain above $40 billion in 2018. This trend is driving earnings for Applied Materials’ Semiconductor Systems.

Semiconductor Systems’ fiscal 2Q17 earnings

In fiscal 2Q17, Semiconductor Systems’ revenue rose 51.9% YoY (year-over-year) to $2.4 billion as sales to foundry customers doubled to $984 million. The segment also reported 43.4% YoY sales growth in DRAM (dynamic random access memory) and 32% YoY sales growth in logic. On a sequential basis, Semiconductor Systems’ revenue rose 11.6% as sales to DRAM and flash customers rose 32% and 47%, respectively. The segment’s non-GAAP (generally accepted accounting principles) operating margin rose from 25.8% in fiscal 2Q16 to 35.5% in fiscal 2Q17.

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Semiconductor Systems: Guidance

In fiscal 3Q17, Applied Materials expects its Semiconductor Systems revenue to rise 41% YoY to $2.5 billion. Halliday expects this growth to be largely driven by increasing content in smartphones and data centers.

Applied Materials a leader in the WFE market

Applied Materials aims to grow by expanding its market and increasing its market share. According to a Gartner report, Applied Materials dominated the WFE market with a 19.1% share in 2016. In the company’s fiscal 1Q17 earnings call, CEO Gary Dickerson stated that the company’s market share has likely increased to around 22%. Its target is to achieve a market share of 25.5%. Applied Materials aims to achieve a higher market share by tapping into foundry, logic, and memory opportunities.

Foundry and logic opportunities

Foundries are investing more in advanced 10-nm (nanometer) and 7-nm process nodes as their customers demand more sophisticated smartphone processors and high-performance computing and data center processors.

TSMC (TSM) and Intel (INTC) plan to start 10-nm node production by the end of 2017, and Samsung (SSNLF) has started production. Halliday expects about 60% of total foundry spending in 2017 to be in the leading-edge capacity and the remaining 40% to be in the lagging-edge capacity. Next, we’ll look at opportunities in the memory space.

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