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Tickers in this Article: AMAT, KLAC, LRCX
Applied Materials, Inc. (AMAT) is scheduled to announce its fiscal fourth-quarter 2012 results on November 15, 2012. We witness only one downward revision in analyst estimates in the few days before the release. Prior-Quarter Synopsis

Applied's third quarter 2012 pro forma earnings were above the Zacks Consensus Estimate due to lower-than-expected operating expenses.

Revenue of $2.34 billion was down 7.8% sequentially but better than management's revised guidance of at least a 10% sequential decline. Improvement in the Display business and in-line performance of the Applied Global Services (AGS) segment led to better-than-expected revenue.

Orders in the quarter were down 34.9% sequentially due to weak orders across all segments. Gross margins also decreased sequentially to 41.6% mainly on account of weaker volumes.

Fourth Quarter Guidance

Applied expects revenues and orders to hit the bottom in the fourth quarter of fiscal 2012 unless the global economy deteriorates further. Non-GAAP EPS is expected to come in at 0-6 cents a share. For the fourth quarter, the Zacks Consensus Estimate is pegged at 3 cents, at the midpoint of the guided range.

(Detailed earnings results can be viewed in the blog titled: Applied's Outlook Disappoints

Agreement of Analysts

Out of the 15 and 17 analysts providing estimates for the fourth quarter and fiscal 2012, respectively, there was one downward revision each in the last 30 days.

A few analysts expect a decent fourth quarter with earnings in line with the midpoint of the guidance of 0-6 cents due to cost cutting measures taken by the new management. They believe that SSG and AGS segments will likely benefit from the Varian acquisition, partially offset by the uncertainties in the core business.

On the contrary, a few analysts remain concerned about the continued weakness in the semi capex spending trends. They expect weak fourth quarter revenue due to likely push outs and timing-related issues due to uncertainties in both foundry and memory capex spending. They also expect the LCD and touch panel equipment market to remain extremely weak in the upcoming quarter.

However, the analysts remain encouraged by solid execution from the new management and believe that the introduction of new products in 2013 will likely increase revenue in the near future. They believe that though new product development will increase research and development (R&D) costs, selling, general and administrative (SG&A) expenses will likely decrease, benefiting gross margins in the coming future.

Additionally, the analysts believe that foundry spending will remain robust in 2013 and Applied will likely benefit from it.

Magnitude of Estimate Revisions

In the past 30 days, the Zacks Consensus Estimate remained unchanged for the fourth quarter at 3 cents but was down by a penny to 72 cents for fiscal 2012.

Over the 90-day period, the Zacks Consensus Estimate witnessed a decline of 9 cents for the fourth quarter and 8 cents per share for fiscal 2012.

The recent weakness in semi cap orders and shipments could be the reason for the decrease in estimates.

Our Recommendation

We expect the company to report weak fourth quarter revenue due to slower overall semiconductor equipment spending levels. Though we believe there is potential in the solar energy market over the long term, we remain cautious about the company's efforts since management has already missed several targets to bring its solar division to profitability.

Applied, which competes with other large equipment makers, such as KLA-Tencor (KLAC) and Lam Research Corporation (LRCX),holds a Zacks #4 Rank that translates into a short-term 'Sell' rating.

Nevertheless, we remain positive on Applied's strong position in the semiconductor market, the solar business in China, a vast portfolio and strategic relationships.

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