AMAT more bullish on 2011, WFE spending

February 25, 2011 – Applied Materials (AMAT) beat estimates in its fiscal 1Q11 results released yesterday (Feb. 24), and sees as banner a year 2011 as it did in 2010.

"Our outlook for the year as a whole is improving," said AMAT chairman/president/CEO Michael Splinter, in the post-PR analyst call. "2010 was a strong recovery year across the board, and 2011 is shaping up to be even better."

A snapshot of the 1Q11 numbers:

  • Overall: Sales $2.69B, down -7% from 4Q10 but up 45% from a year ago. Gross margins rose a tick to 42.3%. Net income was $506M, up 8% Q/Q and up almost sixfold. (Operating income was -4% Q/Q but comparably up vs. 1Q10.) EPS was $0.38, vs. $0.35 in 4Q10 and $0.06 in 1Q10. Backlog increased about 9% ($292M) to $3.54B. (AMAT had originally projected a -8% to -15% slide in sales and $0.32 EPS.)
  • Silicon: Sales up 1% to $1.50B, operating income $543M (-4% Q/Q). Orders down -4% Q/Q; DRAM bookings sunk -40%, while foundry and flash were up. Orders split: 54% foundry, 13% DRAM, flash 10%, and 23% logic. Three customers made up 60% of SSG bookings in 1Q11, vs. 35% in the past two quarters, noted AMAT CFO George Davis.
  • EES (solar): Sales dipped -22% Q/Q to $476M; c-Si tool sales surged almost 30%, only partially offsetting the company’s SunFab write-off (AMAT also recorded $230M thin-film sales in 1Q11). Orders surged 22% to a record $668M. Operating income increased to $144M, partly due to an extra $28M from restructuring.
  • Services: Sales $567M (up 10% Q/Q), thanks to 200mm equipment demand. Operating income decreased to $85M because those 200mm tools have lower margins. Orders were $552M (down 13% Q/Q).
  • Displays: Sales $147M, -48% Q/Q due to cyclical downturn in LCD equipment demand (orders were down -19% to $142M). Operating income decreased to $28M.

And outlook for fiscal 2Q11 and the entire year 2011:

  • Overall: Sales flat to up 5% (midpoint $2.77B), way above consensus of ~$2.52B, and non-GAAP EPS of $0.34-$0.38, also higher than analysts’ expectations. Orders up 1% to $3B. Full-year 2011 sales project to >$11B, a new record by a full $1B, and well past Street estimates of ~$10.1B and $1.29 EPS.
  • Silicon: Sales flat at $1.50B; +10% in FY11. Orders up about 5%-6% to $1.7B.
  • EES (solar): Sales up 10% Q/Q to $536M, but for the full year down -20% to -30%. Orders down about -25% to $500M. Solar installs, though, will be up 23%-47%, particularly strong in Germany, Italy, US (California), and China.
  • Services: Sales $584M, up 3% Q/Q. Up 10%-15% for FY11. Now expects wafer starts to be up 7% vs. 4%. Orders up about 9% to $600M.
  • Displays: Sales flat at $147M, and down -20%–25% for FY11. Orders up about 40% to $200M, with possible upside from new Chinese fab activity.

Digging into AMAT’s semiconductors business (we’ve separated and picked apart AMAT’s solar numbers and key themes here):

Splinter pointed to strong demand for smartphones (55% in 2010, similar growth projected in 2011) and tablets (11M sold in 4Q10, 60M-70M units foreseen in 2011). But the jury’s still out on the PC market, he said, which will determine DRAM investments, though he believes DRAM pricing has "bottomed out."

AMAT has raised its target for 2011 industrywide wafer-fab equipment spending to 10%-15% growth vs. 2010 (roughly $34-$36B), noticeably more bullish than the -10%/+10% range in its November results call, and the company is now tracking 18 fabs (up from 17 in 4Q10). Splinter pointed out a shift in spending mix for WFE: foundry will be close to 40% of 2011′s total WFE spending, NAND will approach previous highs, and DRAM will sink to a decade-low <15% of WFE. "We’ve been surprised how far down the DRAM orders and revenue have dropped and how fast they’ve dropped," Splinter said. "We knew that DRAM wasn’t going to spend as much, but it’s running at a pretty low level right now."

DRAM spending thus has nowhere to go but up, and that’s part of Splinter’s bullish take on WFE spending for 2011. "Whether it comes back in the second half of the year or the beginning of 2012, it makes me have more confidence in the length of this cycle," he said, noting memory is less than half the makeup of WFE capex today than it was three years ago (30% vs. 70%). "I think there’s a lot of room to move in the memory area, but of course, we got to see a strong PC growth to warrant that." (AMAT sees ≥10% growth in PCs in 2011, he noted.) NAND spending, too, "has to continue to increase," Splinter added, an assessment that assumes up to a doubling in NAND density and tablet shipments. "The second half of the year and into 2012, I believe, will be very positive for memory." (Satya Kumar from Credit Suisse, in a research note, points out that AMAT’s comments about 2H11 strength are the sector’s first peek into orders beyond March, which should ease concerns of a 2H11 cyclical decline.)

Splinter said the company gained about two points of marketshare in 300mm WFE spending in 2010 (including nearly four points in etch, much of that from memory) and predicts another point of share in 2011. "We think that this trend of one to two points a year can continue for a few years," he said, predicting foundry gains in PVD and CMP, and inspection tools for 28nm-node work. Wafer-level packaging "will be a small driver of share gains in 2011," he noted, with 2012 being a much stronger year with production volumes and a $500M market. AMAT has 12 new products on the board for 2011 release, he added.

CJ Muse from Barclays Capital breaks down the likely wins at customer sites, in the table below.

Silicon segment Wins at customers
Metrology, inspection - CD-SEM at Micron
- U-Vision 4 shared/ outright positions at Samsung memory, Global Foundries, TSMC
Etch - Dielectric etch at Samsung LSI
- Silicon etch at Toshiba, Samsung memory
- Tungsten etch at Samsung memory, Hynix
Interconnect electrochemical plating (ECP), via Semitool (not 3-D TSV) - Samsung LSI
- Elpida
- Split position at Micron, Global Foundries
- Might make progress at TSMC
ECP for 3-D TSV - Intel
- TSMC
- Early read: roughly 75% of decisions have resulted in AMAT POR
CMP - Cu CMP biz from Ebara
- CMP win at Hynix
PECVD/HDP - Wins at Intel for PECVD
- Flowable oxide proliferation for STI fill in memory
PVD - Shared position in Samsung memory and foundry
- Position at Hynix

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