EUR 850.00 For Business Accounts Only

Morningstar | Osram Talk Takes Shine Off AMS’ Strong Results; Maintaining CHF 50 FVE

AMS announced financial results that exceeded our expectations, with the top line modestly surpassing our forecast and profitability well above our model and the firm’s guidance. Management’s guidance for the upcoming quarter suggests strong product launches and factory utilization after several quarters of operational improvements and strong design activity. However, despite this rosy operational picture, the firm’s strategy is in question as a result of the continued discussion around purchasing German lighting company Osram. Management said on the call that they had been approached with potential financial backing that would allow them to pursue further discussions with Osram—just one a week after AMS released a statement that it had stopped pursuing a deal. We struggle to see the strategic rationale that would make Osram an attractive purchase and await further details from management.

We are maintaining our CHF 50 fair value estimate and reiterate our no-moat rating. With our very high uncertainty rating for AMS remaining in effect, we currently view shares as fully valued.

Revenue in the second quarter was EUR 370 million, up nearly 70% year over year. As we expected, consumer-related sales were the main driver of the growth. The firm’s portfolio of various 3D-sensing technologies (active stereo vision, Time-of-Flight, and structured light) have enabled it to increase its reach beyond the Apple ecosystem into Android. While these capabilities are primarily in front-facing sensing systems, AMS’ products are increasing ramping in world-facing systems, which are needed to help enable new augmented reality applications. AMS also noted that behind-OLED sensing products (which allow for bezel-less, edge-to-edge displays) were shipping in volumes during the quarter. However, it was gross margin that was most impressive during the quarter, increasing more than 500 basis points sequentially to an adjusted 37.4%.

Management’s outlook for the third quarter assumes very strong revenue of roughly EUR 550 million at midpoint, implying approximately 30% revenue growth year-over-year. AMS’ management also expects adjusted operating margin to be greater than 25%, which suggests adjusted gross margins in the mid-40% range, by our estimates. We believe this heady guidance is achievable, but we also reiterate the volatility of AMS’ core consumer market, its continued (if diminishing) dependence on iPhone sales, and the ever-present threat of trade uncertainties. While management stressed that current trade issues had not affected AMS’ business with “major Asian OEMs,” which we understand includes Huawei, investors should be cautious because of the fluidity of the situation.

An extra layer of caution is warranted after management’s quick reversal on Osram. After the Munich-based lighting firm announced a EUR 3.4 billion sale to private equity firms Carlyle Group and Bain Capital in early July, rumors emerged that AMS had thrown its hat in the ring. Osram then said on July 15 that AMS had in fact been interested in pursuing a deal. AMS released a statement the following day confirming that it had engaged in discussions with Osram but did not see a compelling reason to continue discussions. However, on July 23, AMS indicated that it had once again returned to evaluating a potential transaction with Osram. Management was coy regarding how Osram fit within its strategic vision, and we struggle to understand how it would benefit from pursuing this deal. We will watch the situation closely, however, and are eager to hear further evidence from management that any deal would support the firm’s long-term strategy and financial stability.