Tech sector earnings are entering their heaviest period and there’s sure to be much to say about them. One thing’s for sure, this should be a big quarter for many players because a truly large number of companies have benefited from the pandemic-induced changes in behavior. In this blog, I’ve highlighted results for three companies and said why these stocks are worth picking up-
ASML Holding N.V. ASML
ASML is a leading provider of advanced technology systems for all the major global semiconductor manufacturers. It designs, develops, integrates, markets and services these advanced systems so customers can make integrated circuits for application across electronic, communications and other information technology markets.
Headline numbers for the June quarter: Earnings of $1.97 topped the Zacks Consensus Estimate of $1.89. Revenue of $3.66 billion was also ahead of the estimated $3.54 billion.
Highlights of the quarter: The transition to EUV tools that facilitate manufacturing on smaller nodes has essentially insulated the company from any major impact from COVID. Barring the initial period of supply delays and increased absenteeism, things are proceeding normally and production is more or less back to normal levels.
Management commentary centers on how demand from logic customers remains strong, while memory customers appear to be coming back. China, which contributed 23% of revenue in the last quarter, is expected to remain strong through the rest of the year with minimal impact from new U.S. export rules.
Capacity continues to be ramped up even as cycle times are reduced. As a result management expects the company to ship higher volumes in the second half than in the first with further increases in 2021.
Since EUV tools are also related to higher service revenue, the growing installed base is expected to bring a corresponding upward trend in these revenues. The company continues to invest in the remote diagnostics and augmented reality tools that enabled it to service customers more effectively during the lockdown.
Management said that expected increase in cash flows in ensuing quarters would be used to buy back shares and increase the dividend.
Other investing details-
Zacks Rank #1
VGM Score B
Industry: Semiconductor Equipment – Wafer Fabrication (top 43%)
Topped the Zacks Consensus Estimate for the June quarter by 4.2%
2020 earnings are expected to grow 15.2%, 2021 earnings to grow 38.3%
Taiwan Semiconductor Manufacturing Company Ltd. TSM
Taiwan Semiconductor is the world’s largest dedicated integrated circuit foundry (a contract manufacturer of semiconductor integrated circuits (ICs) for customers based on their proprietary IC designs). Its competitive advantage lies in its advanced production processes that have attracted many leading semiconductor ODMs and those using semiconductors in their products.
Headline numbers for the June quarter: Revenue of $10.39 billion was ahead of the Zacks Consensus Estimate of $10.36 billion. EPS of $0.78 was also ahead of the expected $0.73.
Highlights of the quarter: Most of its demand is currently coming from 5G infrastructure development and high performance computing (HPC) customers. While smartphones remain a weak category (management expects the decline in the last quarter to grow into a trend in the second half), 5G smartphone production will ramp up and penetrate up to a high-teens percentage share of the smartphone market.
Smartphone and HPC are the most significant markets for TSM, accounting for around 80% of its revenue. They therefore set the demand outlook for the company that management believes remains unchanged in the mid to long term. TSM’s leadership position will help it generate 20% growth in 2020 (including impact from new U.S. regulations), higher than the mid-to-high-teens percentage growth expected for the foundry industry.
Since a foundry has huge fixed cost of operation in all the machinery that it must have available to attract customers, the utilization of this capacity is a very significant factor in determining its profitability. Also, setting up equipment for new/more advanced processes that help it maintain its competitive lead, increases cost. So when new processes are set up and qualified for production, there is a corresponding hit to profitability.
Both these factors will be in play through the rest of the year. Capacity utilization will remain strong although a rate wasn’t mentioned (that’s despite the fact that TSM doesn’t currently expect to ship to Huawei after Sep 14). So there will be a positive impact on profitability. But since it will be ramping up the 5nm process beginning in the third quarter, there will be a negative impact from that and currency. The net effect is expected to be slightly negative on a percentage-of-sales basis.
As such, management believes that TSM is set to continue growing at the high end of their long-term growth projection of 5% to 10% CAGR (in U.S. dollar terms), raising 2020 capex to $16-$17 billion. They also committed to continued cash dividends on both annual and quarterly bases.
Other investing details-
Zacks Rank #1
VGM Score B
Industry: Semiconductor – Circuit Foundry (Top 1%)
June quarter earnings topped the Zacks Consensus Estimate by 6.9%
2020 earnings are expected to grow 46.1%, 2021 earnings to grow 4.6%
Limelight Networks, Inc. LLNW
Limelight Networks is a content delivery partner for Internet businesses and entertainment companies. Its client roster includes more than 1,300 such brands that bypass the crowded/busy public Internet by shifting content through its servers, networks and other infrastructure. The resultant speed and efficiency with which their programs, processes and other content are delivered to their global audience help them monetize their digital properties.
Headline numbers for the June quarter: The company reported earnings of 3 cents a share, better than the Zacks Consensus Estimate of a cent. Sales of $59 million were also ahead of the estimated 57 million.
Highlights of the quarter: Limelight’s record second-quarter revenue came on the back of pandemic-induced reliance on the Internet and content delivery in general. In particular, the work-from-home trend and increased demand for digital entertainment, including new on-demand offerings from NBC Universal and Warner Media, played a big role.
Average revenue per customer remained at an industry-high level of around $100,000. There was strength at existing customers although new customer acquisitions were impacted by the pandemic. Nonetheless, initiatives to improve customer experience and effectiveness continued.
With around 38% of revenue generated internationally, FX is usually a factor that impacts results. The pound had a negative impact in the last quarter.
In periods of such strong demand, there is also better asset utilization. Costs were also negotiated lower, so there was a positive impact on profits.
Management stated that OTT video and online gaming, which together represents a $5 billion opportunity, provides the basis for the achievement of its long term annual growth target of 15%. They said that there would be sequential growth in both the third and fourth quarters and raised the revenue and EBITDA guidance for the year.
Other investing details-
Zacks Rank #2
VGM Score B
Industry: Internet – Services (Bottom 37%)
Limelight reported yesterday after the bell so estimate revisions are pending.
2020 earnings are currently expected to grow 400%, 2021 earnings to grow 91.7%
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