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Operating Efficiency Drives Applied Materials’ Profitability

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Nov. 20 2020, Updated 2:51 p.m. ET

Applied Materials’ profitability

Applied Materials (AMAT) has a diversified product portfolio, which helps it mitigate the impact of downturns in any one industry or customer on its overall earnings. AMAT’s profitability is similar to Lam Research (LRCX), which also has numerous products that overlap in deposition and etching. However, AMAT has a broader portfolio.

Applied Materials’ profitability is lower than that of KLA-Tencor (KLAC), as the latter’s expenses are concentrated in a smaller portfolio. KLAC also enjoys strong cash flows from service business, as does AMAT.

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Gross margin

Over the last year, Applied Materials (AMAT) has maintained its non-GAAP gross margin above 46.0%. It expects its gross margin to remain sequentially flat at 46.7% in the fiscal third quarter and the fiscal fourth quarter. AMAT’s gross margin is closer to LRCX’s gross margin of 46.8% but lower than KLAC’s gross margin of 64.0%.

Operating margin

Applied Materials improved its non-GAAP operating margin by 180 basis points YoY (year-over-year) to 29.6% in the fiscal second quarter. It expects this margin to cross 30.0% in the fiscal third quarter as it improves its operating efficiency.

In the March quarter, AMAT had the lowest operating expense ratio of 16.6% compared to LRCX’s 16.8% and KLAC’s 25.5%. This was the lowest operating expense ratio AMAT has ever achieved. A lower operating expense ratio resulted from stronger revenue growth from a limited increase in expenses. AMAT’s revenues rose 29.0% YoY while its operating expenses rose 15.6% YoY.

AMAT’s operating margin is close to LRCX’s margin of 30.0% but lower than KLAC’s margin of 38.5% for the June quarter.

EPS

The benefit of its operating efficiency trickled down to Applied Materials’ bottom line. The company’s non-GAAP EPS rose 54.0% YoY and 15.0% sequentially to $1.22 in the fiscal second quarter. For the fiscal third quarter, AMAT expects its EPS to fall 4.0% sequentially to $1.17. AMAT expects to increase its fiscal 2018 EPS by over 40.0% YoY to $4.55, which is closer to its 2020 EPS target of more than $5.00.

Next, we’ll look at AMAT’s efficiency ratios.

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