Applied Materials (AMAT) is the world’s largest semiconductor manufacturing equipment supplier. It also supplies equipment to manufacture display screens and provides services to optimize and maintain the equipment it sells.
As AMAT earns more than 60% of its revenue from its semiconductor systems, it depends on the capital spending of semiconductor companies. It’s the first to feel the impact of a downturn or an upturn, as companies tend to reduce their spending ahead of a downturn and increase their spending ahead of an upturn.
Applied Materials’ full-year guidance for the semiconductor industry
On its fiscal 2019 second-quarter earnings call, AMAT’s CEO, Gary Dickerson, maintained his overall outlook that semiconductor spending would fall in the mid- to high-teen percentage YoY (year-over-year) in 2019 driven by declines in memory spending.
Disciplined investment by memory chip makers has started normalizing pricing and inventories in the NAND (negative-AND) and DRAM (dynamic random-access memory) markets, and it will continue to do so through 2019, which will create a favorable capital spending environment for 2020.
Falling memory capital spending has reduced AMAT’s memory revenue by 55% YoY and 28% sequentially to more than a two-year low of $920 million. Its memory revenue is expected to fall ~15% sequentially to $780 million in the third quarter of fiscal 2019.
Foundry and logic spending
Declines in memory spending are being partially offset by increases in foundry and logic spending. Dickerson stated that the semiconductor industry was transitioning to the AI era, driving wafer fab equipment spending in the cloud data center, 5G infrastructure, Internet-of-Things, and automotive technology markets.
AMAT’s foundry and logic revenue rose 32% YoY and 27% sequentially to more than a two-year high of $1.27 billion in the second quarter of fiscal 2019 after falling YoY for more than five quarters. Intel is ramping its 10 nm (nanometer) node, TSMC is upgrading to its 7 nm+ node, and Samsung has ramped up the production of its 7 nm node. The advanced nodes are material intensive, which means more revenue for AMAT.
Strength in the foundry space and weakness in the memory space sent AMAT’s Semiconductor Systems segment’s fiscal 2019 second-quarter revenue down 27% YoY to $2.18 billion, a level it last saw in the first quarter of fiscal 2017. The company expects the segment’s revenue to remain sequentially flat in the third quarter of fiscal 2019.