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AMAT Reports Sluggish Display Equipment Revenue in Q418 and Outlooks Slowing Shipments in 1H19
February 18, 2019
 
Applied Materials (AMAT), a leading toolmaker for semiconductors and displays released their Q1, 2019 earnings results. The company has enjoyed strong revenue and earnings growth over the past few years due to the growth in the number of Gen 6 OLED fab and Gen 10.5 LCD fab capacity. In 2018, the growth reached a peak and now it is expected to drop as new fab commitments and equipment purchases are being delayed or cancelled due to significant excess capacity. AMAT will be impacted by the slower than expected equipment purchases for Gen 10.5 fabs and the cancellation of Foxconn’s Wisconsin and HKG’s Gen 10.5 fab. For OLEDs, Samsung has not committed to a timeframe on their huge A5 Gen 6, nor their QD/OLED hybrid Gen 8.5 nor has LG committed to their Gen 10.5. In China, here has been a marked slowdown in equipment purchases, as funding is taking longer than normal.
 
Here is CEO, Michael Sullivan’s comments about the effect of the display industry on AMAT:

 

• “Display revenue was $507 million and 1 point above the midpoint of our guidance. The Group’s non-GAAP operating margin was 23.3%.”
•  “For the past several years, smartphones drove the majority of wafer fab equipment spending. This year, more than half of customers’ investments will be driven by other categories as new growth drivers, including cloud data centers, IoT devices, 5G and automotive applications gain momentum.”
• “In display, weakness in emerging markets is also impacting the timing of customers’ investment plans. We see some TV factory projects pushing out of year and into 2020. As a result, we now believe our display equipment revenue in 2019 will decline by about a third from 2018's record levels. We also expect revenue in the second fiscal quarter to be significantly lower than our average run rate for the year.” 
• “Over the longer term, we believe the display market remains attractive as the industry is going through several large technology transitions as larger substrates are introduced in TV manufacturing, rigid OLED adoption increases in smartphones and expands to other applications and initial flexible OLED products get closer to release. These inflections create important growth opportunities for Applied over the next several years.”
• “In the six years through 2018, we were able to grow the display business at a compound annual growth rate of around 25% to $2.5 billion last year. In 2019, we signaled incremental weakness on the last call. And the market has continued to weaken since that call. We now believe that the market is down around a third from 2018’s record levels with second quarter -- our second quarter to be significantly lower than our projected average run rate for 2019 and 2020. Relative to the mix on -- what we have is the biggest incremental change since the last call as weakness in TV, delays in TV investments. It’s still compelling for customers to go to Gen 10.5 panels because you can produce eight 65-inch TVs versus three on Gen 8.5. So, it’s strategically important for them to go and make that transition. But, the timing of the investments is being pushed out. And then, going into 2020, we see small improvement in 2020. And we defiantly like the longer-term technology trends and opportunities to grow the business. The biggest difference from our last call is in TV market.”
• “The run rate of our Display business in Q2 will be below the annual average. So, we would see -- expect to see that growing into the back part of the year.   Our Display business in China will be down, in line with our overall global Display forecast. 

 
AMAT mentioned of rigid OLED getting a foothold seems misplaced as even Samsung is rethinking the product line and AMAT’s comment that the initial flexible products are nearing release, refers to foldable, since flexible is already mainstream.