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What Lies Ahead for Applied Materials’ Display Segment

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Applied Materials’ Display segment

Earlier in this series, we saw that Applied Materials’ (AMAT) two core business segments, Semiconductor Systems and Applied Global Services, saw strong fiscal 2Q17 earnings as foundries and memory makers are transitioning to advanced manufacturing technologies.

Amid strong growth, the Display segment, which accounts for 11% of the company’s revenue, witnessed a sequential decline. However, its YoY (year-over-year) growth was strong, driven by increasing adoption of OLEDs (organic light-emitting diodes) in smartphones and large-format televisions.

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Display segment’s earnings

Applied Materials’ Display revenue more than doubled on a YoY basis to $391 million in fiscal 2Q17. The segment’s non-GAAP (generally accepted accounting principles) operating profit rose 170% YoY to $84 million, representing an operating margin of 21.5%.

On a sequential basis, the segment’s revenue fell 7.3% because of supply constraints in the OLED market. There have been several media reports of a growing order backlog from Japan’s (EWJ) Canon Tokki, a unit of Canon that supplies manufacturing equipment used by OLED screen makers Samsung Display (SSNLF), LG Display, and Sharp. Canon Tokki has a monopoly in the OLED manufacturing equipment space. There is very high demand for OLEDs, but there are not enough machines to manufacture them, which has slowed the sales growth of Applied Materials’ Display segment.

Mobile OLED displays

According to a report by The Korea Herald, Apple (AAPL) is looking to use OLED displays in 2017 iPhones. However, it is facing delays from suppliers Samsung Display and LG Display. At present, Samsung Display is the sole supplier of OLED panels for Apple, dominating the market with a 95% share. LG Display is expected to start producing OLED panels by calendar 3Q17 but could face poor yield.

Applied Materials chief financial officer Robert Halliday expects OLED displays to be used in just 38% of smartphones in early 2018, despite strong demand. He expects this percentage to increase to 55% by 2020 and 67% by 2021.

Display segment’s earnings guidance

In fiscal 3Q17, Applied Materials expects its display revenue to increase 27% YoY to $397.5 million, representing a sequential growth of 1.6%. The segment’s operating margin is expected to contract to 18.5% in fiscal 3Q17.

In fiscal 2017, the company expects its display revenue to increase 50% YoY to $1.8 billion. China (FXI) is a major market for displays, and display revenue in this market is expected to grow 50% between 2015 and 2017.

Analysts are concerned that Applied Materials may not be able to achieve 50% growth in fiscal 2017, as supply constraints of Canon Tokki’s equipment may delay revenue. Next, we’ll look at Applied Materials’ balance sheet.

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