Analyst Conference Call Summary

semiconductors

conference date: February 11, 2015 @ 1:30 PM Pacific Time
for quarter ending: January 25, 2015 (first quarter, Q1 fiscal 2015)

Forward-looking statements

Overview: Continued revenue growth with leveraged earnings growth.

Basic data (GAAP) :

Revenues were $2.36 billion, up 4% sequentially from $2.26 billion and up 8% from $2.19 billion in the year-earlier quarter.

Net income was $348 million, up 36% sequentially from $290 million and 38% from $253 million year-earlier.

EPS (diluted earnings per share) were $0.28, up 33% sequentially from $0.21 and up 33% from $0.21 year-earlier.

Guidance:

For Q2 2015 sales are expected to be flat to up slightly sequentially. Non-GAAP diluted EPS between $0.26 and $0.30. SSG sales up 4% to 8%; AGS up 5% to 10%; display sales $160 million (down 42%); EES sales $70 million (up 27%).

Conference Highlights:

“Major technology inflections in semiconductor and display are creating new growth opportunities for Applied’s precision materials engineering products and services,” said Gary Dickerson, CEO. We are growing faster than the markets we serve. We have developed new products that differentiate us from competitors and improve margins.

Tokyo Electron merger will accelerate our progress towards our goals. Working with global regulators on a "coordinated proposal" to complete the merger as soon as possible.

A period of sustained investment by Applied's customers is being driven by inflections in video, wearables, mobile devices, etc. Wafer fab equipment spending could grow 5% or move y/y in 2015. Believes spending on advanced nodes will be biased to a strong second half of year. FinFET will be highly beneficial to Applied. Memory market is tight; led by mobile; Applied booked highest quarter in years. But transition to 3D NAND has been slower than forecast. Display demand is healthy for bigger, higher resolution screens.

The greatest swing factor in our guidance model is how much FinFET spending is caught by the end of the fiscal year in October.

Non-GAAP numbers: operating income $447 million; net income $338 million, flat sequentially from $338 million million, and up 21% from $279 million year-earlier. EPS $0.27, flat sequentially from $0.27, but up 17% from $0.23 year-earlier. 42.3% gross margin.

$2.27 billion in overall orders, up slightly sequentially, from $2.26 billion, but down 1% y/y. The backlog declined by 5% to $2.78 billion, partly due to currency adjustments.

Silicon Systems Group (SSG) segment sales were $1.45 billion. Orders were $1.43 billion up 7% sequentially. DRAM and NAND orders increased, but foundry and logic/other decreased. Etch grew 90% sequentially, which lowered margins. Investments from 2012 are starting to pay off in memory spending. CVD is growing significantly faster than the market.

Applied Global Services (AGS) revenue was $583 million. Orders were $690 million, the second highest in company history, but down 8% sequentially. Focus is on signing long-term service contracts. Sees continued revenue growth and margin expansion growing forward.

Display segment revenue was $275 million, up 45% y/y. Orders were $107 million, down mainly on lower TV equipment. Operating margins are improving.

Energy and Environmental Solutions (EES) [solar] revenue was $55 million. Orders were $50 million.

Cash and equivalents (including long-term investments) balance ended at $3.9 billion, flat sequentially from $3.9 billion. Cash flow from operating activities was $60 million, low from display tool revenue that had been previously secured by cash advances. Capital expenditures were $49 million. $122 million was used for cash dividends. Long-term debt was $1.95 billion. No cash was used to repurchase stock in the quarter. Non-cash share-based compensation was $48 million.

Cost of goods sold was $1.40 billion, leaving gross margin of $959 million. Operating expenses of $501 million consisted of: research and development $351 million; selling and marketing, $111 million; general and administrative $39 million. Leaving income from operations of $458 million. Interest and other expense net $21 million. Income tax $89 million.

Q&A:

SSG order breakout by memory and foundry? Foundry was a little under $500 million, memory total was about $700 million. Logic and other was about $200 million.

Margins, given statement of stronger 2H? Margin pressure is within SSG due to a changing mix to memory etch and CVD. The pressure should lessen in the second half as foundry orders pick up.

Hasn't foundry been traditionally front-half loaded? It is a question we talk about a lot. Last year it was even earlier than previous years, in my opinion, because a leading foundry had the Apple business and wanted to ramp effectively. They took our epi tools earlier to make sure they were working well. This year is different because our customers say they are going to spend a lot of money ramping FinFET, but it looks like that ramp will be later in the year.

Market share segment statements are in dollars as measured by DataQuest and it was mainly in memory, both DRAM and NAND. We are optimistic we will do well again in calendar 2015.

People are wondering why the Tokyo Electron merger is taking so long? We each have a very complicated business. We are making progress with regulators. Can't say more.

Could memory fall off sharply in the second half? We think memory is stronger in the first half of our fiscal year. We don't think it will fall off because utilization is high, it is just a matter of timing and mix.

Color on solar and display market seasonality? We are managing solar well. The end-user market is doing well, but there is still excess capacity. So there are just quarter to quarter variations. In display our position has been strong, we have new products and have gained market share. There are two broad segments, TV and smaller devices. This year's booking seem to be swinging towards the smaller form factors. We've been shipping TV equipment that we booked last year. This year's TV bookings are expected lower, but the smaller form factors greater.

FX headwinds? Yen is down significantly, which is the biggest impact on us. We price in dollars, but hedge the impact. The impact is more for Tokyo Electron because they bill in yen.

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