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Earnings Preview: Applied Materials earnings to decline in Q2

Applied Materials (AMAT) plans to release its second quarter results on Thursday after the bell. The chip equipment maker’s share price has risen about 38% since December last week where it touched a new 52-week low level of $28.79. Despite the tough macros faced by the industry, the recovery in the stock price could be attributed to the pickup in demand in the second half of 2019.

In late April, Texas Instruments (TXN) reported lackluster Q1 results as there is muted product demand across the board. Sales and earnings dropped 5% and 11% respectively. Investors are expecting Applied’s earnings to remain muted in the second quarter.

Muted Expectations

Sales is expected to drop about 24% in the second quarter to $3.48 billion and earnings to decrease about 46% to $0.66 per share. The company has guided adjusted EPS of $0.62 to $0.70 and sales to be between $3.33 billion to $3.63 billion.

Semiconductor industry has been facing multiple headwinds due to lower demand along with huge inventories forcing a fall in chip prices. In order to clear the inventories, chip makers have cut back their investments which would be hurting Applied Materials which is selling chip-making machines to chip manufacturers. Last quarter, the company’s management told analysts that inventory levels would come down in the late 2019.

Check out the recent earnings transcript for more insights

In the first quarter, sales decreased 11% to $3.75 billion and adjusted EPS fell 25% to $0.81. However, the results were better-than-expected by the street. Applied saw 5% dip in sales from the Semiconductor Systems division offset by growth in the Applied Global Services and the Display and Adjacent Markets segments.

Applied gets lion’s share of revenues from the Asia Pacific region with China leading the pack. The ongoing tariff battles and slowdown in the Chinese economy could impact sales. The company also gets one-third of revenues from three firms: Samsung, Taiwan Semiconductor and Intel. If these firms witness slow growth, it will have a ripple effect on the top line.

On the segments front, Semiconductor division would be impacted by weak macros offset by improved sales from the Global Services and Display segments.

Peers Performance

Intel (INTC) reported 11% dip in profits on flat revenue growth. Q1 earnings surpassed estimates, while revenue matched expectations. However, the stock plunged about 7% due to weak outlook, which missed estimates.

Advanced Micro Devices (AMD) reported better-than-expected results in the recent quarter. AMD expects to see improved sales driven by growth from all its businesses.

There wouldn’t be too many surprises in store for Q2 results when Gary Dickerson meets analysts on May 16. However, shareholders would be expecting more insights from Gary and his team on the industry outlook and how the company plans to tackle the industry slump in the latter half of 2019.

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