Analyst Conference Call Summary

semiconductors

conference date: November 17, 2016 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2016 (fourth quarter, Q4 fiscal 2016)

Forward-looking statements

Overview: Continues to show strong growth, but the stock price reflects little of that, yet.

Basic data (GAAP) :

Revenues were $3.30 billion, up 17% sequentially from $2.82 billion and up 25% from $2.37 billion in the year-earlier quarter.

Net income was $610 million, up 21% sequentially from $505 million and up 82% from $336 million year-earlier.

EPS (diluted earnings per share) were $0.56, up 22% sequentially from $0.46 and up 100% from $0.28 year-earlier.

Guidance:

For the December quarter (Q1 fiscal 2017) revenue expected between $3.2 and $3.34 billion. Non-GAAP EPS $0.62 to $0.70.

Conference Highlights:

“We’ve focused our organization and investments to deliver highly differentiated solutions that enable customers to build new devices and structures that were never possible before,” said Gary Dickerson, CEO. "Applied has an increasingly positive outlook."

For the full year Applied Materials had its highest orders since the year 2000. Both the Display Group and Service Group exceeded all time highs for both orders and revenue. Expects patterning opportunity to expand to about $3 billion by 2019, as eUV will be only about 20% of the market. First Gen 10.5 (large format TVs) LED fab chose Applied, and OLED for mobile demand is growing, so believes 2017 display capital spend will be about $2 billion over 2016. Also believes wafer fab equipment spending will be up 5%. Applied is also winning market share in inspection, CVD and etch.

New order total was $3.03 billion, down 17% sequentially from $3.66 billion and up 25% from $2.42 billion year-earlier. In the future will no longer give orders on a quarterly basis, but will give some details in fiscal Q1.

Non-GAAP numbers: net income $722 million, up 31% sequentially from $550 million, and up 108% from $347 million year-earlier. EPS $0.66, up 32% sequentially from $0.50, and up % from $ year-earlier. 43.7% gross margin, flat y/y. 25.2% operating margin, up from 22.8% year-earlier.

The backlog was $4.58 billion, down 7% sequentially from $4.95 billion. 45% was in Semiconductor Systems, 19% in Services, 34% in Display, and 2% in other.

GAAP gross margin was 42.4%, operating margin was 23.6%.

Semiconductor Systems [formerly Silicon Systems Group] segment sales were $2.13 billion, up 19% sequentially from $1.79 billion, and up 43% from $1.49 billion year-earlier. Orders were $1.83 billion, up 27% from $1.44 billion year earlier. Orders by type: Foundry 64%, DRAM 10%, Flash 16%, Logic and other 10%, representing a shift y/y to Foundry.

Applied Global Services (AGS) revenue was $693 million, up 5% sequentially from $657 million and up 13% from $611 million year earlier. Orders were $794 million, up sequentially from $590 million, and up y/y from $743 million.

Display segment revenue was $452 million, up 44% sequentially from $313 million and up 106% from $219 million year-earlier. New orders were $387 million. Moving to OLED. Thin film encapsulation is a difficult technology that Applied Materials leads in.

Energy and Environmental Solutions (EES) [solar] revenue will no longer be reported, moved in part to Display and the rest to Corporate and Other.

Cash and equivalents (including long-term investments) balance ended at $4.68 billion, up sequentially from $4.26 billion. Cash flow from operating activities was $797 million. Capital expenditures were $88 million. $108 million was used for cash dividends. Long-term debt was $3.14 billion. $171 million was used to repurchase stock in the quarter. Non-cash share-based compensation was $51 million.

Cost of goods sold was $1.90 billion, leaving gross profit of $1.40 billion. Operating expenses of $622 million consisted of: research and development $394 million; selling and marketing, $114 million; general and administrative $114 million. Leaving income from operations of $777 million. Interest and other expense net $37 million. Income tax $130 million.

Applied Materials expect cash flow growth to continue and is considering both continued buy-backs and an increase in the dividend. 106% of free cash flow for the full year was used for dividends or buybacks.

Q&A:

How should we think about your outperformance relative to the industry going forward? In fiscal year 2017, in semi we think global demand will grow and we will gain share, but we don't want to give numbers right now. We think display and service will grow. We think we will outperform in the markets we are in, but in addition we think those markets will also grow.

WFE market up about $1 billion in 2017, details? We think NAND is up next year, we think foundry is strong, logic is pretty good, DRAM up but not high historically, so more upside in 2018. We don't expect a big increase in China spending until 2018.

Book to bill in 2017? We see our orders strong in 2017. We won't release data by quarter, but we see a strong Q1 and year over all. Our revenue will be up in 2017.

China in 2017? We think it is down a little bit to flat, which is up significantly from a couple of years ago. 2018 could be significantly up.

Are you expecting 10 nm reuse for 7 nm? It is going to be modest, I think, because 10 nm is not going to be a big node.

We think the industry is becoming more seasonal and less cyclical. Total memory spend, both DRAM plus NAND, spend has been up over $1 billion per year every year since 2012. Volatility is going down. We think our Q1 bookings are up and our market share is up. Foundry tends to be more seasonal, taking most exquipment in March through August. This year we saw sustained demand for 3D NAND.

On prior call you thought Q4 orders would be flat from Q3, but they fell, why? We wanted to give you a sense that our growth was sustainable. We only said orders would remain above $3 billion after spiking in Q3; they would not fall off a cliff. We did think we would be a bit higher in Q4. We now think we will be sequentially higher in Q1. It is mainly just timing.

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