Revenue Pull By Japanese Competitors Could Distort Market Sentiment For Applied Materials

Summary

• North American and Japanese semiconductor equipment companies pull in revenues the last month of Q4 of each FY.
• This pull-in of revenues by the Japanese companies is distorting and inflating QoQ revenues reported for the previous quarter ending March 31, 2018.
• MoM revenue growth for Japanese equipment companies was 25% in March 2018 due to pull-in versus 0.4% for N. American companies with no pull-ins.
• Applied Materials reports its next quarter earnings on May 17, one month later than North American and Japanese competitors.
• The distorted revenues from the Japanese competitors could influence investor sentiment.

Semiconductor equipment suppliers typically pull in revenues in the last month of Q4 of their fiscal year, so their results look better to their investors. This can be achieved by expediting deliveries or designing payment terms to be made before the end of the period.

North American companies, whose fiscal year usually ends on December 31, pull in revenues December, the last month of Q4, as shown in Chart 1. This is for North American billings from 2015 to 2018.

Chart 1

Note that the last month of the year shows a sharp rise in revenue. The following several months are usually flat because revenue that would have normally been received in Q1 is pulled in to the last month of the current quarter.

Japanese companies are no exception, except that companies typically end their fiscal year at the end of March. As shown in Chart 2, the trend is the same - a dramatic rise in the last month of the fiscal year, corresponding to FY Q4.

Chart 2

How are Applied Materials Earnings Affected

North American companies are reporting financials for CY Q1 at the same time as Japanese companies are reporting financials for FY Q4. There is little impact on investor sentiment on stock valuations for North American because they are reporting at the same time as the Japanese.

However, Applied Materials (NASDAQ:AMAT) ends its quarter one month later, so instead of March 31, like most companies, it ends on April 30. Thus, the distorted revenue growth seen in Chart 2 is published in the media at least several weeks before AMAT reports. As a result, it could influence investor outlook prior to AMAT's earnings call.

Here's an example of what I'm writing about. Japan's Tokyo Electron (OTCPK:TOELY) reported earnings on April 25, 2018, which is about three weeks prior to AMAT's earnings call on May 17, 2018.

Chart 3 comes from TEL's earnings call slides. Note that Q4 FY 2017 (ended March 31, 2017) through Q3 FY2018 (ended December 31, 2017) revenues are flat but jump in Q4 FY2018. TEL's revenue shows a Q3-Q4 growth of 38.1% compared to Q2-Q3 growth the previous quarter of -8.1%.

Chart 3

My Estimates for Applied Materials Semiconductor Revenues

In an April 16, 2018, Seeking Alpha article entitled "What Can We Expect From Lam Research's Q3 Earnings Call, I used earnings data similar to Chart 1 to attempt to forecast Lam Research's revenues for Q3 based on the company's revenue guidance. I won't repeat the chart here, but present a similar chart forecasting AMAT's revenue.

AMAT does not give guidance for its Semiconductor segment, but does so for the company as a whole. I've estimated its Q2 FY2018 revenue for the segment and present it in Chart 4. I expect revenues of $2.89 billion, representing a QoQ growth of 1.4%.

Chart 4

Investor Takeaway

Applied Materials will present its Q2 FY2018 earnings on May 17, 2018. And I project QoQ revenue growth of 1.4% for semiconductor equipment. If one were following revenues of Japanese competitor Tokyo Electron, which grew 38.1% last quarter, one might estimate that AMAT's revenue would be comparable.

I used Tokyo Electron as one example, but there are others. For example, Hitachi High Technologies, which competes with AMAT in ETCH, exhibited revenues 33.1% QoQ, which are comparable to Tokyo Electron's revenue increase of 38.1%.

I wrote in a February 5, 2018, Seeking Alpha article entitled "Sizeable Changes In Semiconductor Equipment Market Share In 2017," that Lam Research (LRCX) and Japan's Tokyo Electron gained market share in 2017 over 2016 share as Applied Materials lost share.

Comparing Chart 1 with Chart 2, Japanese competitors exhibited an overall increase of 25.1% MoM in March 2018, compared to only 0.4% for North American equipment companies.

I based on my analysis of AMAT's share loss in ETCH to both companies, Implant to Axcelis (ACLS), CMP to Japan's Ebara, and ALD to Korean equipment suppliers.

An analyst, investor, or trader looking at the distorted revenues announced by Japanese companies in the semiconductor equipment space would make the wrong assumption that AMAT's revenues would be equally strong. In my opinion, this would be incorrect. All the data I've presented in this article needs to be considered.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.