conference date: November 13, 2014 @ 1:30 PM Pacific Time
for quarter ending: October 27, 2014 (fourth quarter, Q4 fiscal 2014)
Overview: Within guidance, good y/y growth.
Basic data (GAAP) :
Revenues were $2.26 billion, nearly flat sequentially from $2.27 billion and up 14% from $1.99 billion in the year-earlier quarter.
Net income was $290 million, down 4% sequentially from $301 million and up 58% from $183 million year-earlier.
EPS (diluted earnings per share) were $0.23, down 4% sequentially from $0.24 and up 53% from $0.15 year-earlier.
For Q1 fiscal 2015 (ending January 2015) net sales are expected to be flat to up 5% sequentially. Non-GAAP EPS range $0.25 to $0.29. This excludes known Tokyo Electron acquisition-related costs of $0.03 per share.
"We are making our largest gains in areas of the market that are growing the fastest, including etch and deposition, and we carry positive momentum into 2015." Results were around the middle of the prior guidance range and matched analysts' average estimate. New strategy around precision materials is making good progress.
Believes gained market share in fiscal 2014, and will continue to gain, for instance in CVD and etch. Was the best year for Silicon Systems Group revenue since 2007. Believes the industry will continue to increase spend in 2015, with FinFET leading. 3D NAND spending should also ramp in 2015. Fab utilization increased in 2014, and the trend should continue in 2015, which should help AGS (service) business. Higher resolution small screens, as well as larger screens, is driving display equipment demand.
New, disruptive products will be introduced in 2015.
Tokyo Electron merger continues on track. Germany gave unconditional approval today, but closing might be delayed until Q1 of calendar 2015. Tokyo Electron merger will help Applied gain scale, which should result in higher profitability.
Adoption of new inspection technology tools is rapid. Will be introducing new, disruptive products in the future. There are unprecedented technology transitions in semiconductor manufacturing that are the most disruptive in decades. The next wave is FinFET.
In 2014 shifted another $200 million from corporate expense and non-essential R&D into the most high value projects.
GAAP gross margin was , sequentially from 43.8%, up basis points y/y. For the full year margins grew by 6 points.
Non-GAAP numbers: operating income $442 million; net income $338 million, down 3% slightly sequentially from $349 million, and up 48% from $228 million year-earlier. EPS $0.27, down 4% sequentially from $0.28, but up 42% from $0.19 year-earlier. 44.2% gross margin.
$2.26 billion in overall orders, down 9% sequentially, but up 8% y/y. The backlog declined 2% sequentially to $2.92 billion, consisting of SSG 48%, AGS 27%, display 20%, and EES 5%.
Silicon Systems Group (SSG) segment sales were $1.43, down 3% sequentially. Orders were $1.33 billion, down 15% sequentially due to decreased in DRAM, Flash, and foundry. New orders were 50% foundry, 20% DRAM, 18% logic and other, and 12% Flash.
Applied Global Services (AGS) revenue was $592 million, up 4% sequentially. Orders were $747 million, up 35% sequentially.
Display segment revenue was $190 million, up 60% sequentially. Orders were $130 million, down 56% sequentially, and continue to be lumpy. Display group gained market share in 2014.
Energy and Environmental Solutions (EES) [solar] revenue dropped to $48 million, with orders decreasing to $44 million.
Cash and equivalents balance ended at $3.9 billion, sequentially from $3.8 billion. Cash flow from operating activities was $407 million. Capital expenditures were $63 million. $122 million was used for cash dividends. Long-term debt was $1.9 billion. No cash was used to repurchase stock in the quarter. Non-cash share-based compensation was $45 million.
Cost of goods sold was $1.30 billion, leaving gross margin of $959 million. Operating expenses of $547 million consisted of: research and development $360 million; selling and marketing, $99 million; general and administrative $90 million. Leaving income from operations of $412 million. Interest and other expense net $14 million. Income tax $108 million.
January quarter gross margin details? Most of the expected decline is due to shipping new etch tools, which have lower margins.
Merger insights? We were pleased to get the German sign off. Each country does a separate process.
2015 progress on 2016 goals? We are making pretty good progress on SSG share. A year ago we were behind on the AGS business, but we are picking up now. I can see reasonable revenue growth through 2015 and 2016, getting us closer to the model. The display business is doing great, and even solar is picking up a bit. On gross margin we were ahead of plan last year, so we should hit that model. We are investing heavily in products, so we may be over on expenses. We have a bunch of cash we can do buy backs with, so the share count will come down.
AGS order strength just seasonal? We have improved the value we provide for customers as they ramp new, tough to implement technologies. Our contract revenue has ticked up. We are also driving costs down. We believe growth is sustainable.
Wafer fab equipment share? Last year we gained 1.4% market share, with revenue up 25% y/y. We believe demand for wafer fab equipment will grow next year and we will outgrow the industry. Within TAM growth we are strong in the particular products needed for FinFET. We are very well positioned in memory, as shown by the etch and CVD share gains this year.
Buy backs, cash available after merger? Half of cash is off shore. We believe we will be able to efficiently return cash to investors after the merger.
Wafter fab equipment in calendar 2015? We see continued strong foundry investment weighted to FinFET. Also first 10 nm pilot projects. In memory we see investment being up. Logic should be relatively flat.
16 nm buildout? In 2015 focus will be below 20 nm. Every one of our customers wants to come out with lower power, higher performance devices. There is a war for mobility leadership.
Tokyo Electron has had a really good year, with good operating margins. The $500 million per year synergy savings for 2017 is a good number, but we will have more information post-merger.
What we hear from customers is strong investment in cap ex next year, weighted towards the newer, lower nm nodes.
Our overall position in China is very good, but it is not a large driver for us next year.
CVD and etch share gains details? The gains are weighted more to memory. The etch revenue for 2014 is 2.5 times where we were two years ago. The combined CVD+etch growth in revenue in 2014 is 50%. The ramp of new products has been significant, which has hurt margins in the short run. "We are very optimistic about our outlook going forward in those markets."
There is seasonal upward pressure in operating expense in fiscal Q2 due to salary raises, and there will also be the cost of introducing new products.
We have many leadership products in FinFET that should benefit from FinFET transition in 2015.
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