Applied Materials Impresses

Fiscal second-quarter sales rose 8% sequentially, to $3.546 billion, as strong equipment and service revenue were modestly offset by a decline in display revenue. While NAND flash sales expectedly grew by 48% over the prior quarter as manufacturers build out 3D NAND capacity, we were surprised to see DRAM revenue improve so significantly at 33% sequentially. We note DRAM pricing has been strong in recent months, and we surmise major suppliers such as Samsung, SK Hynix, and Micron are increasing equipment spending to take advantage. In the past, aggressive DRAM capacity expansion has led to periods of oversupply, so we doubt that DRAM spending will remain elevated for an extended period. Meanwhile, sales to Taiwan and Korea rose 2% sequentially, with these regions accounting for over half of total sales due to 10-nm spending by TSMC and Samsung. Gross margins rose 100 basis points quarter over quarter to 45.1%, as the firm benefited from a mix shift away from lower-margin display revenue. With display spending expected to rebound in subsequent quarters, we project margins to decrease modestly going forward.

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