Analyst Conference Call Summary

semiconductors

conference date: May 14, 2015 @ 1:30 PM Pacific Time
for quarter ending: April 26, 2015 (second quarter, Q2 fiscal 2015)

Forward-looking statements

Overview: Solid quarter, strong guidance.

Basic data (GAAP) :

Revenues were $2.44 billion, up 3% sequentially from $2.36 billion and up 4% from $2.35 billion in the year-earlier quarter.

Net income was $364 million, up 4.5% sequentially from $348 million and up 39% from $262 million year-earlier.

EPS (diluted earnings per share) were $0.29, up 3.5% sequentially from $0.28 and up 38% from $0.21 year-earlier.

Guidance:

Revenue up 2% to 6% sequentially. At midpoint would be up 12% y/y. Non-GAAP EPS $0.31 to $0.35.

Goal is non-GAAP EPS of $1.70 in 2017.

Conference Highlights:

Highest quarterly revenue in past 3 years. "Magnitude of technology change facing our customers is unprecedented... We have created a pipeline of differentiated products that will accelerate Applied's growth ... we are winning market share."

Margins have been negatively affected by new product pipeline, but steps will be taken to restore them.

Next week we will begin to buy back stock under our $3 billion program.

Non-GAAP numbers: operating income $476 million; net income $362 million, up 7% sequentially from $338 million million, and up 4% from $348 million year-earlier. EPS $0.29, up 7% sequentially from $0.27, but up 4% from $0.28 year-earlier. 41.6% gross margin.

$2.52 billion in overall orders, up 11% sequentially, from $2.27 billion, but down 4% y/y. The backlog was flat at $2.78 billion, partly due to currency adjustments.

Silicon Systems Group (SSG) segment sales were $1.56 billion, up 8% sequentially. Orders were $1.70 billion, up 19% sequentially. Believes revenue in 2015 will increase slightly over 2014, led by memory. Believes Applied will win market share during shift to 3D NAND. FinFET is a great growth opportunity over the next few years as foundries compete to satisfy customers.

Applied Global Services (AGS) revenue was $646 million, up 11% sequentially. Orders were $641 million, down 7% sequentially. Service revenue was a record for a quarter, and was up 17% y/y.

Display segment revenue was $163 million, down 41% sequentially. Orders were $120 million, up 12% sequentially. Expects double digit revenue growth in 2015. Organic LED is a growth area.

Energy and Environmental Solutions (EES) [solar] revenue was $73 million, up 33%. Orders were $50 million, flat sequentially.

Cash and equivalents (including long-term investments) balance ended at $4.17 billion, up sequentially from $3.9 billion. Cash flow from operating activities was $298 million. Capital expenditures were $64 million. $123 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 $ million.

Cost of goods sold was $1.43 billion, leaving gross margin of $1.02 billion. Operating expenses of $600 million consisted of: research and development $365 million; selling and marketing, $109 million; general and administrative $140 million. Leaving income from operations of $416 million. Interest and other expense net $24 million. Income tax $25 million.

Q&A:

3D NAND ramp traction? Yield had been a challenge, it is getting to a point that more volume is going to 3D. It is good for our business because planar was more litho oriented, but 3D involves more steps including EPI and etch. To start the same number of wafers customers might need 35% to 50% more equipment from Applied. The TAM (total addressable market) is increasing and our share of TAM too.

By 2016 the majority of NAND spending will be in 3D.

Linearity, 2H vs. 1H? We think 2H will be stronger than the first half.

For the last two quarters the DRAM business has been up significantly as we gained share.

Operating expense vs. revenue? Revenue should grow in 2016. We don't think operating expense has been the margin problem, it has been gross margins (costs of goods sold), and that is the biggest doubt in our 2016 model. It depends on mix.

We believe we can do the $3 billion buy back within two years, and can do buy backs for years, perhaps by taking on some debt.

10 nm? We have heard customers say 10 nm is the most important node in the history of their company, driven by the need to get more computation capability in mobile devices. Cap ex per wafer start should continue to climb, so it is a great opportunity for Applied. We have more Epi steps, more PVD, etc. It is the sweet spot for materials engineering. 20 nm was not a big node, and there was some reuse, but 10 nm should be a big node.

EUV (extreme ultraviolet) is not likely to be significant until after the 10 nm node. It will potentially come in with multiple patterning.

Foundry space gains? PVD and Epi, both up 3% in last year. All the areas around the transistor. Our high current share in foundry is around 90%. Our etch business has been making progress in foundry, and should be a great long term opportunity. The future nodes of FinFET will provide us with a much bigger TAM opportunity.

DRAM prices are down a little bit, and costs are up a bit, so DRAM capacity adds are likely to be moderate near term.

The percentage of mobile within display went up to double, but we expect it to go back to the historic mix with TV.

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