conference date: November 16, 2017 @ 1:30 PM Pacific Time
for quarter ending: October 31, 2017 (fourth quarter, Q4 fiscal 2017)
Overview: Another record quarter. Record annual revenue. Display segment particularly strong.
Basic data (GAAP) :
Revenues were $3.97 billion, up 6% sequentially from $3.74 billion and up 20% from $3.30 billion in the year-earlier quarter.
Net income was $982 million, up 6% sequentially from $925 million and up 61% from $610 million year-earlier.
EPS (diluted earnings per share) were $0.91, up 7% sequentially from $0.85 and up 63% from $0.56 year-earlier.
Q1 fiscal 2018: $4.0 to $4.2 billion revenue, up 25% y/y at the midpoint. 32% y/y growth in semi; 17% in services, but lower sequentially on normal seas; display up 6% y/y. $705 to $725 million. $0.94 to $1.02 non-GAAP EPS.
Believes will do better in 2018 than had previously indicated at Analyst Day. On schedule for 202
Gary Dickerson, CEO, "Across the company we are firing on all cylinders ... confident that in 2018 we can deliver 2018 double digit growth." Smartphone competition and AI are driving demand. AI will be a major driver for 7 nm and 5 nm modes. 2018 market size will be larger than 2017 and prior guidance.
"We believe WFE will remain sustainably higher than in the past." WFE = wafer fabrication equipment.
Non-GAAP numbers: net income $1,005 million, up 8% sequentially from $927 million, and up 39% from $722 million year-earlier. EPS $0.93, up 8% sequentially from $0.86, and up 41% from $0.66 year-earlier. 46.2% gross margin, up from 43.7% year-earlier. 28.7% operating margin, up from 25.2% year-earlier.
Semiconductor Systems sales were $2.43 billion, down 4% sequentially from $2.53 billion, and up 19% from $2.13 billion year-earlier. Revenue by type, as % of total: Foundry 36%, DRAM 12%, Flash 38%, logic and other 14%. Segment operating income was $801 million or $847 million non-GAAP, margin was 32.9% or 34.8% non-GAAP.
Applied Global Services (AGS) revenue was $831 million, up 6% sequentially from $786 million and up 20% from $693 million year earlier. Operating income was $232 million or $232 million non-GAAP.
Display segment revenue was $677 million, up 65% sequentially from $410 million and up 50% from $452 million year-earlier. Non-GAAP operating income was $215 million, with a 31.8% gross margin.
Cash and equivalents (including long-term investments) balance ended at $8.42 billion (% onshore), up sequentially from $8.34 billion. Cash flow from operating activities was $0.7 billion. Capital expenditures were $124 million. $107 million was used for cash dividends. Long-term debt was $5.3 billion. $385 million was used to repurchase stock in the quarter.
Total backlog was $6.03 billion, consisting of: Semiconductor $2.99 billion; services $1.13 billion; display $1.85 billion.
Cost of goods sold was $2.18 billion, leaving gross profit of $1.79 billion. Operating expenses of $689 million consisted of: research and development $466 million; selling and marketing, $105 million; general and administrative $118 million. Leaving income from operations of $1.10 billion. Interest and other expense net $24 million. Income tax $92 million.
Operating margin target? We've made great progress these last 4 years. We are funneling more resources to R&D, which has driven organic growth. We plan to continue to improve margins, including beyond the current guidance period.
End market drivers of WFE growth? 2017 was a record year. We see fundamentals being strong into 2019. Demand drivers are additional layers like AI, IoT, autonomous driving, big data, SSDs, and handsets. Capital intensity is up; in foundry it is up 100% over the last few years. Customers are investing a lot while making a lot of money. There is a balance between foundry logic and memory. Display drivers are larger TVs and Gen 10.5 equipment, and mobile OLED. These should be multi-year drivers; we have long lead times.
DRAM capacity vs. 2018 bit demand? We see a disciplined market, demand led, 25% bit demand growth, but just an incremental bit capacity grow. Customers are healthy, making money. Adopting power and performance capabilities, which helps our leadership.
Display operating margin improvement? Partly scale, partly continuing improvement. Our target is high 20s margin.
NAND in 2018? We see 40% bit growth or higher. Half the install base has not converted to 3D NAND. So the market looks demand led. We see a lot of room to grow solid state drives. Roadmaps go to large numbers of layers in multiple generations.
Why not increase the dividend? 89% of excess cash has been returned to shareholders. There is an impediment to increasing dividends because much of our cash is offshore. When we get clarity on tax policy we will optimize dividends v. buybacks.
Is there a level where WFE levels off, how can it be sustainable? There are diverse demand drivers supporting trends that unlock economic value. Also, the industry never went to 450 mm wafers. "If I had to take an over/under on WFE, I'd take over right now." In contrast to the PC cycle, there is a smartphone war every holiday season. Yet 40% of foundry spending is in trailing nodes.
In the last few years we have gained 19 points of share in patterning.
We have strong pull from our customers on new materials, on new innovative materials.
We see the 7nm mode on par with 28 nm. We think 7 nm and 5 nm will be large. We see a diversification of demand drivers.
"The architecture war that is happening in AI is not over."
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