- Applied Materials' S-4 and Prospectus is filled with information that could mislead investors.
- Technical and economic factors affecting Applied Materials have been overlooked or ignored.
- Applied Materials' pattern of spin and mis-information suggests management's disclosures should be re-visited by analysts and investors.
In a previous Seeking Alpha article I wrote that Applied Materials' (NASDAQ:AMAT) use of spin in its last conference call by avoiding the "P" word (pushouts) enabled its stock to increase 8% whereas KLA-Tencor (NASDAQ:KLAC) did use the "P" word and its stock dropped by 8%.
In that article, I pointed to several areas where AMAT represents its financial information by a careful selection of words that sway investors and analysts.
Tokyo Electron Limited (OTCPK:TOELY) recently announced its Prospectus and S-4 filing in preparation of the AMAT-TEL merger deal and, after examining the S-4 filed with the Securities and Exchange Commission on May 9, 2014, I've come to the conclusion that misleading and misrepresented financial information that is critical to the evaluation of performance is blatantly repeated.
The tables on page 80 of the S-4 are both illuminating and misleading, another example of AMAT's spin. The S-4 table forecasts growth to 2019 but I cut it off at 2016 in my Table 1 below to fit on the page.
If we look carefully there are several misleading data points.
1. I added the column "actual" in Table 1 to the S-4 table from data taken from its public filings. Note that while revenues converted from yen to US dollars for TEL (fourth row) are the same as what TEL reported in its filings, NET INCOME as reported by TEL here on page 12 is -28.5 billion yen, which when converted at the exchange rate of 98.77 yen/$ (which AMAT uses as a footnote to the S-4 table) equates to -$289 million. AMAT quotes +$165 million. To make certain that we are talking apples to apples, revenues include all of TEL's sectors - semiconductor (SPE), photovoltaic (PV), and flat panel display (FPD) equipment. Note that TEL revenues are quoted in the S-4 table and Table 1 above have been converted by AMAT from TEL's fiscal year ending in March to coincide with AMAT. Thus, we need to sum up Q4 FY 2013 and Q1-3 FY 2014 in TEL's chart. Again, revenues match the S-4 table but Net Income miraculously changed from -$289 million to +$165 million.
This S-4 was submitted to the SEC on May 9, after TEL reported its Fiscal year earnings. A huge discrepancy designed to show TEL made a profit in 2013 when in fact it recorded a loss. This is a blatant case of misleading investors.
2. Row 3 in Table 1 shows wafer fab equipment spending with an anticipated growth of 17.9% in 2014, 15.2% in 2015, and -2.6% in 2016. However, revenues for both AMAT (row 2) and TEL (row 3) are for all sectors of each company, which includes PV, which has been a disaster for both AMAT and TEL. So that part is misleading. In other words, revenues are for all sectors for both companies, yet row 3 is for semiconductor equipment.
However, where these wafer equipment revenue figures come from is beyond me. I pointed out in the above mentioned previous article on Seeking Alpha that revenue growth for 2014 will be lucky to increase 10% in light of the "P" word. I wrote that AMAT's CEO Dickerson, in his last earnings call, stated:
Overall, while there have been some adjustments in customer's investment plans in recent months…. But if you look at all of the different customers in the segments and you add it all up based on what we are saying, we are still in the range of the 10% to 20%, maybe it's more towards the bottom end of that range, but still in that range.
AMAT's Q2 earnings call was on May 15, 2014.
Note the cleverly worded non-use of the "P" word was substituted by "some adjustments in customer's investment plans." But more importantly, anticipated growth of the semiconductor equipment industry is at the bottom of a "10% to 20% range," which is very far from the 17.9% number AMAT projects in the S-4 table.
The S-4 was submitted to the SEC on May 9. The conference call was May 15. One would assume that AMAT knew the anticipated revenue growth for the year one week before the call and could have made the change in the S-4. Another case of misleading investors and also the SEC.
3. Of more interest, however, is that AMAT anticipates that its revenue growth will beat wafer equipment spending growth for the period 2014-2016, based on a comparison of the % change columns in Rows 1 and 3. In fact, historically that is not the case, as shown in Table 2, which came from AMAT's 10-K filings.
For the period 2010 - 2013, row 2 shows wafer fab equipment spending (CY ending December) and AMAT's revenues (FY ending October). Since only 2 months separates the CY and the FY, numbers can be reasonably compared. Historically, in 2010, 2011, and 2013, AMAT's revenue growth was less than the overall wafer equipment growth. In 2012 it was the same. Yet Table 1 states that it will be more. Is it a case of wishful thinking or a case of misleading investors?
4. If we go back to Table 1, in row 5, AMAT's Non-GAAP net income percentage change is forecast to increase 14.9% in 2014, 18.6% in 2015, and 19.1% in 2016.
TEL's net income in row 6 is projected by AMAT to increase 5.0% in 2014, 7.7% in 2015, and 8.7% in 2016.
Historically, net income growth between 2009 and 2013 is clearly nowhere near these high growth rates, as shown in Table 3 below.
Note that in this table, TEL's revenues and net income are based on their current fiscal year ending in March, whereas Table 1 (and the S-4 table) was converted by AMAT for a fiscal year ending in October. Thus, FY2010 ending in March 2010 includes three quarters of revenue in calendar year 2009 and one quarter of 2010, which is why I laid out Table 3 the way I did, since FY2010 includes only one quarter of 2014 and three quarters of mostly 2009, and so on for successive fiscal years. AMAT's financials are not affected in the FY conversion of TEL.
According to Table 2 (row 5), AMAT's Non-GAAP revenue decreased 1.4% in 2009 and increased in the range of about 10-12% for three years and 16.3% in 2011. However, going back to projections of net in Table 1, AMAT's Non-GAAP net income percentage change is forecast to increase 14.9% in 2014, 18.6% in 2015, and 19.1% in 2016. These numbers are significantly larger than historical net incomes.
More prominent is the discrepancy with TEL's forecast and historical net incomes. TEL's net income is projected by AMAT to increase 5.0% in 2014, 7.7% in 2015, and 8.7% in 2016 according to Table 1, row 6. Historically, however, TEL's net income was negative for two years, less than 2% for two years, and 5.7% and 10.8% for the other two years.
Also note that TEL's net income has been dropping the past three years and now, all of a sudden from AMAT's projections, we are to expect a hockey stick recovery.
The same is true for AMAT's Non-GAAP net income - dropping the past three years and now, all of a sudden we are to expect a hockey stick recovery.
This is another case of misleading investors.
If you look at the above data supplied by AMAT, and then look back to my recent articles in Seeking Alpha, we see a trend. That being the case, and calling a spade a spade, I suggest these statements border on fraudulent information that the SEC should look into. Regarding market share, AMAT can say what they want and no one has the data to refute their statements. They selectively disclose revenue from each of the 20 or so individual sectors to Gartner, another situation the SEC should look into, because, according to Art Sherman of AMAT,
we have a business relationship with them.
AMAT, in turn, sells market share information to stock analysts. Ever wonder about the market share data in analyst reports all sourced by Gartner? AMAT is then not accountable because the source is Gartner, not AMAT.
Where are the stock analysts who are supposed to be analyzing? It is incredulous to me that the same analysts present at the KLAC and AMAT conference calls can see things negatively for KLAC and positively for AMAT? They get paid a lot of money to tell you what AMAT wants them to know and what Gartner sells them, regurgitates it, and feeds it to their accounts. I only get paid a penny a hit for anyone reading this article, so I'm not in it for the money, just to have the truth uncovered. I've spent 30 years analyzing the semiconductor industry. I own no stock and do not play the market.
One reader of a recent Seeking Alpha article of mine on the solar market commented, "I am glad I ignored the timing of your articles. I will continue to be bullish AMAT to $24."
It is understandable that this investor should think the stock will reach $24. It probably will, but it will be based on misinformation given out in public documents.
If we look back at historic data in Table 3, net income from both AMAT and TEL have dropped for the past three years. This to me is a sign of weak management. In mathematics, -1 + -1 = -2, not +2, so the combination of weak managers can spell disaster in the future once AMAT and TEL merge. But yet AMAT's spin is that there will be miraculous growth once these companies are combined. I've said it before and I'll repeat myself - AMAT management is over their heads.
And since it is my turn to spin, here's my take on the AMAT-TEL merger and AMAT management. My personal feeling on the Dickerson issue is that Splinter was highly disregarded in the industry as CEO of AMAT. By picking Dickerson as CEO (the presidency was a slam dunk because of the acquisition), Splinter could defer any failure for the pending acquisition of TEL to Dickerson. If it was a success, Splinter got the acknowledgement because he appointed Dickerson as CEO to handle it. If it was a failure, it was Dickerson's fault. A win-win for Splinter.
Yes, there will be an upward blip in revenues for AMAT once the "P" word is rectified. But once equipment sold for the conversion of flash and NAND into 3D devices is completed, and remember sales to Intel (NASDAQ:INTC) have already been factored in to AMAT's previous earnings, the blip will be short lived. And don't forget Lam Research (NASDAQ:LRCX), which leads the etch market and, with the acquisition of Novellus, is a strong player in deposition. Both etch and deposition technologies will see increased usage in 3D, which AMAT is banking on, yet it looks as if the market has discounted Lam's effectiveness and it shouldn't. Another key player is ASM International (NASDAQ:ASMI). They lead the industry in atomic layer deposition (ALD), and can end up dominating the 3D market and taking share away from TEL.
I have sent this article prior to publication by e-mail to many key executives, Investor Relations, and Art Sherman asking them to refute any of these allegations and I have not had a reply. In fact, over the past several weeks I have written several articles about Applied Materials and sent them by e-mail, again with no response.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.