Analyst Conference Call Summary

semiconductors

conference date: November 14, 2013 @ 1:30 PM Pacific Time
for quarter ending: October 27, 2013 (fourth quarter, Q4 fiscal 2013)

Forward-looking statements

Overview: Solid quarter, but the big what-if is the planned merger with Tokyo Electron in 2014.

Basic data (GAAP) :

Revenues were $1.99 billion, up slightly sequentially from $1.98 billion, and up 21% from $1.65 billion in the year-earlier quarter.

Net income was $183 million, up 9% sequentially from $168 million and way up from negative $515 million year-earlier.

EPS (earnings per share) were $0.15, up 7% sequentially from $0.14, and way up from negative $0.42 year earlier.

Guidance:

Net sales up 3 to 10% sequentially. SSG up 15% to 20% sequentially. AGS revenue down. Display down 15% to 30%. EES flat. $0.20 to $0.24 non-GAAP EPS.

Conference Highlights:

Tokyo Electron merger should accelerate profitable growth with an expanded set of precision material engineering tools for the industry. Integration planning is already underway. Believes approval for merger will take place in second half of 2014.

Earnings were towards the high end of guidance. Revenue was in line with expectation. Bookings and new product penetration were both strong. Fiscal 2013 saw many changes that should enable future profitability growth.

Much more manufacturing capacity will be needed to create sufficient mobile tablet and smartphone chips. Flash and DRAM investment should also grow in 2014. Mobile DRAM is having supply constraints and high prices. $27 to $30 billion dollars in total industry wafer fabrication investment expected in 2014.

FinFet is the next foundry battleground. Applied has a strong position in the critical transistor technologies. Believes will also gain etch and inspection market share.

Two thirds of R&D spending in the year was shifted to disruptive products, like evaluation tools.

Non-GAAP numbers: operating income $323 million; net income $228 million, up 2% sequentially from $223 million; EPS $$0.19, up 6% sequentially from $0.18, and up 217% from $0.06 year-earlier.

$2 billion in overall orders.

Silicon Systems Group (SSG) segment sales were $1.24 billion, a slight decline, with orders of $1.39 billion, up 16%. Non-GAAP segment operating income $258 million or 21% of sales. Composition of new orders: 47% foundry; 25% flash; 17% logic; 11% DRAM. Applied is winning market share in 3D Nand.

Applied Global Services (AGS) revenue $538 million, up 8%, with orders of $548 million, up 6%. Non-GAAP segment operating income $116 million or 22% of sales. There was a $20 million charge for a customs duty assessment, which AMAT hopes to reverse in the future.

Display segment revenue was $163 million, up slightly. Orders were at $114 million, down 55% sequentially as customer pushed out orders. Non-GAAP segment operating income $19 million. There was a $10 million inventory charge in the segment. Global demand for large TVs is increasing. Mobile display technologies are changing, requiring new investment. Applied took market share this year.

Energy and Environmental Solutions (EES) [solar] revenue was $44 million, about flat sequentially, but orders were $40 million. Non-GAAP operating loss $22 million.

Cash and equivalents balance ended at $2.9 billion, down sequentially from $3.03 billion. $19 million cash flow from operations due to working capital requirements from increased demand. Accounts receivable up 40% to $1.63 billion. Inventories also grew. $120 million was used for cash dividends. $47 million was used to repurchase shares. Long-term debt near $1.95 billion.

Gross margin was 42.0% non-GAAP, 40.0% GAAP, both declining sequentially, but up y/y. Aiming for over a point of non-GAAP margin improvement in fiscal 2014.

Cost of goods sold was $1.19 billion, leaving gross margin of $795 million. Operating expenses of $584 million consisted of: research and development $338 million; selling and marketing, $99 million, general and administrative $117 million; restructuring $30 million. Leaving income from operations of $211 million. Interest and other expense net $8 million. Income tax $11 million.

Q&A:

20% evaluation in 2 quarters, prior statement? We think it will be bigger than that, but are not giving a number today.

Margins with share gains? Many moving parts. We are a bit more optimistic on Q1 than last quarter on improved mix. But mix could turn negative in Q2. New product penetration is a leading indicator of share gains.

Flat y/y Silicon in Q1? We think the wafer fab equipment market will be good next year. But we are not projecting full year 2014 share and revenue yet.

Penetration in Nand etch? We are making progress in etch this year. We hope to gain 5 point of etch in 2014, focused in conductor etch, 3D, and foundry. We have strong technology for our customers' inflections.

Orders, DRAM? DRAM was down, overall orders were up. We did remarkably well in a very large foundry in the last few months, some of which will fall into Q1. But DRAM is not a strong area at this time.

Solar strategy? We have reduced solar operating expenses. While demand is soft we are trying to reduce earnings drag. There are some specific opportunities, but we believe EES will remain soft in 2014.

Japanese orders, particularly DRAM? We believe DRAM will go a bit higher due to strength in mobile DRAM, but not significant in 2014. Nand flash will be more important for growth in 2014.

Taiwan order ramp, seasonality? Foundry in 2014 will have a significant 20 nm ramp, and all foundries want to move to FinFet as soon as possible. Seasonality as we have seen the last few years, we are not making predictions for 2014 at this time.

Reported orders from Taiwan, discrepancy? There is not a strict correlation within a quarter, we are optimistic about Q1.

Four points of share gain in inspection statement? We see very strong pull from customers in inspection, especially in foundry and logic at 20 nm and in FinFet because of layer penetration. We have imaging capabilities that really leverage our strength. E-beam inspection position is being strengthened; 3D is driving more demand there.

Operating expense guidance? Beginning of calendar year we raise pay, so there is some upward risk in fiscal Q2, but we will try to compensate with savings elsewhere.

We have a big backlog in display, and the lead times tend to be months and months. So we have good visibility there.

In SSG we are in investment mode right now. We are cutting back on solar.

The focus of the customers at present are to get 20 nm and finfet to work. These involve new materials and they constitute a very big transition.

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