- Applied posted $1.57 billion revenue in Q1 2013, a 5% sequential and 28% annual decline; the rate of decline slowed this quarter.
- 44% sequential increase in Q1 2013 orders which implies that demand in semiconductor industry is recovering.
- Even a slight increase in 2013 PC shipments can increase capital spending by semiconductor manufacturers.
- Growing mobile shipments can fuel demand for Applied’s silicon system and display divisions.
- NAND demand could increase, though DRAM investments will remain low.
- Larger TV sizes & 4K resolution technology could fuel display demand in 2013.
With macro headwinds leading to soft demand for consumer products, most semiconductor manufacturers reduced their capital spending, which in turn led to a drastic drop in Applied Materials (NASDAQ:AMAT) equipment sales. Applied recently announced its Q1 2013 earnings and at $1.57 billion its revenue marked a 5% sequential and 28% annual decrease, though the rate of decline slowed considerably compared to previous quarters. (Read: Applied Materials Earnings Hint At Recovering Semiconductor Equipment Market)
With a 19% sequential decline in orders in Q4 2012, Applied believes its orders have bottomed out at the end of fiscal 2012. The company saw orders growing 44% sequentially (reaching $2.1 billion) in Q1 2013, which is proof of the reviving demand in the semiconductor industry. Despite lower revenues, a growing mix of silicon system revenue, lower inventory reserves as well as the strong execution and efficient management of discretionary spending helped Applied return to profitability in Q1 2013.
We remain optimistic on Applied’s long term prospects as we think that the accelerated changes in device technology, and the adoption of new materials in the industry will fuel its top line growth. Additionally, we believe that the increasing complexity in manufacturing processes provide an added opportunity for growth.
Here we highlight certain key trends and concerns impacting Applied’s valuation.
Applied’s semiconductor manufacturing systems are used by integrated device manufacturers and foundries to build and package memory, logic and other types of chips. Weak market conditions in 2012 have caused pullbacks in expansion plans throughout the industry as manufacturers adjusted their production levels to match the end-user demand, which led to a slight decline in Applied silicon system group (NYSEARCA:SSG) revenue. However, in Q1 2013, Applied witnessed a greater than 80% increase in semiconductor orders, which make us believe that the situation could improve this year.
Slowdown In PC Shipments In 2012; 2013 Might Be Better
The slowing enterprise market, consumer softness in mature markets (U.S. and Western Europe), slowing demand growth from emerging markets, operating system transitions and cannibalization by tablets are some of the main factors leading to the current slump in PC shipments. Research firm IDC estimate global PC shipments to have declined annually by 3.2% in 2012. 
We feel that the launch of Windows 8 OS and the introduction of new touch-enabled and hybrid ultrabook models will help drive demand in 2013. Even a marginal increase in PC shipments this year can drive growth for logic spending.
Increasing Mobile Shipments To Drive Demand
With robust expansion in the smartphones and tablets market, mobile devices are slated to fuel the future growth in the semiconductor industry. The global sales of media tablets are estimated to increase from 119 million units in 2012 to 370 million units by 2016.  On the other hand while global mobile device sales declined by 1.7%, smartphone sales grew by more than 35% in 2012. 
Intense competition in the mobile market is leading to faster innovation and the high demand of application processors is driving foundries to build out their 28-nanometer capacity and ramp investment for the 20-nanometer node. Applied considers the above trends to be favorable as they create spending shifts that are favorable to its business.
Applied believes that mobile customers will account for approximately 45% of wafer fab spending in 2013.  Gartner estimates the wafer fab equipment (WFE) to have declined by 13.3% in 2012.  Based on the customer demand so far, Applied forecasts 2013 wafer fab equipment spending to be flat to down 10%, compared to $30 billion in 2012.
Weak Demand In The Memory Market: Increasing NAND demand to drive growth in 2013
On account of the excess manufacturing capacity and low demand, the memory market (DRAM & NAND) remained weak in 2012, which impacted demand for Applied’s equipment. While Applied claims that DRAM prices have started to rise, it anticipates low levels of investment in 2013.
On the other hand, Applied believes that the NAND demand will grow by close to 50% in 2013, which it feels is sufficient to drive investment in new capacity addition. With new application wins in NAND flash, improving prices and higher utilization rates, the company is seeing positive momentum. Additionally, Applied anticipates higher spending this year for building the 3D NAND technology.
Apart From Mobility Trend, Larger TV Sizes & 4-K Resolution Technology To Fuel Display Demand
Applied display segment orders grew by 66% in Q1 2013, on account of the ongoing mobility investments and the beginning of resurgence and TV equipment orders. Though its customers still remain cautious about the end-demand, Applied believes that with the larger models in the TV industry reaching attractive prices and the introduction of new 4-K resolution technology, there could be a marginal increase in investment in display factories this year.
Additionally, with a higher number of touch-enabled hybrid (notebook-tablet) models hitting the market, orders for equipment to manufacturer touch panels and high performance mobile screens remain strong as production moves to larger substrate sizes.
- Soft PC Shipments in Fourth Quarter Lead to Annual Decline as HP Holds Onto Top Spot, IDC Press Release, January 10, 2013
- Gartner Says Worldwide Media Tablets Sales to Reach 119 million Units in 2012, Gartner Press Release, April 10, 2012
- Gartner Says Worldwide Mobile Phone Sales Declined 1.7 Percent in 2012, Gartner Newsroom, February 13, 2013
- Applied Materials’ CEO Discusses F1Q13 Results – Earnings Call Transcript, Seeking Alpha, February 13, 2013
- Gartner Says Worldwide Semiconductor Manufacturing Equipment Spending to Decline 11.6 Percent in 2012, Gartner Press Release, March 21, 2012
Disclosure: No Positions