Analyst Conference Call Summary


Applied Materials

conference date: August 14, 2014 @ 1:30 PM Pacific Time
for quarter ending: July 27, 2014 (third quarter, Q3 fiscal 2014)

Forward-looking statements

Overview: Revenue down sequentially, but net income up, and nice y/y numbers.

Basic data (GAAP) :

Revenues were $2.27 billion, down 3% sequentially from $2.35 billion and up 15% from $1.98 billion in the year-earlier quarter.

Net income was $301 million, up 15% sequentially from $262 million and up 79% from $168 million year-earlier.

EPS (diluted earnings per share) were $0.24, up 14% sequentially from $0.21 and up 71% from $0.14 year-earlier.


For fiscal Q4 revenue is expected flat sequentially, plus or minus 3%. Non-GAAP EPS estimated between $0.25 and $0.29. That excludes known integration and acquisition charges of $0.03 per share.

Conference Highlights:

Tokyo Electron merger is making progress. Believes regulatory approval will be given before the end of 2014. Already preparing to integrate the companies. Cannot give details during the regulatory approval process.

Earnings in the quarter were near the high end of guidance.

Operating margins have improved for 7 sequential quarters as investments hve been focused on areas most benefitting Applied's customers.

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.

GAAP gross margin was 43.8%, up 300 basis points y/y.

Non-GAAP numbers: operating income $477 million; net income $349 million, up slightly sequentially from $348 million, and up 57% from $222 million year-earlier. EPS $0.28, flat sequentially from $0.28, and up 56% from $0.18 year-earlier. 45.5% gross margin.

$2.48 billion in overall orders, down 6% sequentially, but up 24% y/y. The backlog grew 9% sequentially to $2.97 billion, consisting of SSG 51%, AGS 22%, display 22%, and EES 5%. The quarter tends to be seasonally slow for orders.

Silicon Systems Group (SSG) segment sales were $1.48 billion, down 7% sequentially from $1.58 billion. Orders were $1.57 billion, down 6 percent sequentially from DRAM and foundry. New order composition was : 50% foundry; 22% flash; 14% DRAM; logic and other 14%. Product development cycle times are being reduced.

Applied Global Services (AGS) revenue was $567 million, up 6% sequentially. Orders were $552 million, up 3% sequentially and up 7% y/y.

Display segment revenue was $119 million, down 19% sequentially. Orders were $296 million, down 13%, but still at high levels as demand for TV production capacity remains strong. Backlog grew to very high levels. Believes there is an opportunity to grow revenue and margins in this segment. We are seeing opportunities with flexible display products.

Energy and Environmental Solutions (EES) [solar] revenue rose to $103 million, but orders decreased to $66 million. Expects to be above cash-flow break even in the future.

Cash and equivalents balance ended at $3.8 billion, sequentially from $3.4 billion. Cash flow from operating activities was $584 million. Capital expenditures were $ million. $ million was used for cash dividends. Long-term debt was $ billion. No cash was used to repurchase stock in the quarter. Non-cash share-based compensation was $ million.

Cost of goods sold was $1.27 billion, leaving gross margin of $992 million. Operating expenses of $601 million consisted of: research and development $357 million; selling and marketing, $108 million; general and administrative $136 million. Leaving income from operations of $391 million. Interest and other expense net $21 million. Income tax $69 million.

Orders as % of revenue by region: U.S. 27%, Europe 6%, Japan 15%, Korea 9%, Taiwan 20%, China %, other Asia %.

Memory bit production is expected to increase 40% this year. Most capital investment is still in planar memory, but 3D RAM is expected to ramp in 2015. Believes 30% increase in memory spending in 2014, and Applied Materials will gain 2 points of market share.

Believes 2015 SSG demand will be considerably stronger than 2014 demand.

Applied Materials is gaining share in a number of segments within semiconductor manufacturing, including etch, DVD, and display. Also looking for superior financial performance with the revenue generated.


DRAM fab and foundry buildouts, how much is in the future? FinFET was the big driver earlier in the year, is off a bit but should pick up in 2015.

Drivers of gross margin going forward? The disruptive opportunity is new products, which are starting to come and will accelerate in 2015. So far across segments has just been detailed reduction of costs. Because the coming transitions are in Applied's sweet spot, we can grab more of our TAM, and much of it is customer pull.

Merger update? We are convinced this is the right strategy for ouselves and our customers. It is accelerating materials innovation. Integration planning is going very well, with both sides excited about it. We are ahead of schedule at this point.

In 2015 we expect an increase in investment in FinFET technologies. We see foundry investment maybe up slightly. Memory investment we see as up, with a significant increase in 3D.

How do you bridge the gap between results and financial model for 2016? We expect to get to 19.9% in SSG. We are getting there in operating margin. Tax rate is 22% in that model, right now we are 24% to 26%. We are mostly on track, we need more share gain, more cost control, and better tax management.

Are you expecting fiscal q1, December quarter, to be up substantially? We are not guiding yet, but a guess is that our Q1 will be strong.

Are we seeing more stability in your revenue than your peers? The semi industry is becoming less cyclical and more seasonal as it addresses a consumer market more. Our service business is in a growth mode.

The money invested in SSG during the past 2 years is helping with cost reductions and gross margins now.

3D NAND is really more materials enabled than litho enabled, so we have an advantage there. But FinFET is more of our revenue than 3D NAND.

China, display and semi? Display in China is strong as they go through technology transitions. Our market share performance is exceeding our expectations. China is a big percentage of our display business right now.

NAND is probably the biggest percentage growth sub-segment in 2015.

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Copyright 2014 William P. Meyers