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AMAT’s Q2 Profit Margins Fall to a Two-Year Low

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Applied Materials’ profit margins

Applied Materials (AMAT) is the world’s largest supplier of semiconductor manufacturing equipment and has been broadening its portfolio to include the Display segment and other segments. While AMAT’s broad portfolio fetches it more stable revenue than its rivals, its portfolio also increases its expenses, affecting its margins compared to those of its rivals.

AMAT’s profitability is similar to that of Lam Research (LRCX), which has numerous deposition and etching product overlaps with AMAT, but lower than that of KLA-Tencor (KLAC), which has a smaller portfolio.

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Gross margin

AMAT’s non-generally accepted accounting principles gross margin contracted by 170 basis points YoY (year-over-year) to 43.5% in the second quarter of fiscal 2019, falling behind Lam Research’s and KLA Corporation’s gross margins of 45.1% and 60%, respectively. The last time AMAT reported a gross margin of below 44% was in the fourth quarter of fiscal 2016.

AMAT and LRCX expect to improve their gross margins by 30 and 40 basis points, respectively, in the next quarter, but KLAC expects its margin to contract by 150 basis points sequentially.

Operating margin

Significant declines in Applied Materials’ revenue and gross margin reduced its non-GAAP operating margin by 690 basis points YoY to 22.4% in the second quarter of fiscal 2019. Its margin contracted as its most profitable Semiconductor Systems segment’s revenue fell 27% and its operating margin contracted by 880 basis points YoY.

AMAT was behind KLAC and LRCX, which reported operating margins of 31.6% and 25.1%, respectively. AMAT expects this margin to improve in the third quarter of fiscal 2019 as it lowers its expenses and improves its revenue.

EPS

The impact of declining margins trickled down to AMAT’s EPS, which fell 41% YoY to $0.70 in the second quarter of fiscal 2019, beating analysts’ estimate of $0.66. The improvement in its margin is expected to increase its EPS to $0.71 in the third quarter of fiscal 2019.

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