Analyst Conference Call Summary


Applied Materials

conference date: August 13, 2015 @ 1:30 PM Pacific Time
for quarter ending: July 26, 2015 (third quarter, Q3 fiscal 2015)

Forward-looking statements

Overview: Revenue below guidance, but up 10% y/y. Orders were strong, and earnings were the strongest in 4 years and non-GAAP EPS at midpoint of guidance range.

Basic data (GAAP) :

Revenues were $2.49 billion, up 2% sequentially from $2.44 billion and up 10% from $2.27 billion in the year-earlier quarter.

Net income was $329 million, down 10% sequentially from $364 million and up 9% from $301 million year-earlier.

EPS (diluted earnings per share) were $0.27, down 7% sequentially from $0.29 and up 13% from $0.24 year-earlier.


The current quarter (fiscal Q4 2015) sales are expected to be flat to down 7% sequentially. Non-GAAP EPS range $0.27 to $0.31.

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

Conference Highlights:

Orders were $2.89 billion, up 15% sequentially and 17% y/y. Earnings in the quarter were the highest in 4 years. Changes in the business environment in the past few weeks, however, have weakened the outlook for the remainder of the year. Applied Materials has lowered its estimate of foundry spending for the remainder of the calendar year because customers have excess inventory and better than expected yields. Despite the pause in capacity additions, the 10 nm node will start ramping in 2016 and plays to Applied's strengths.

300 mm semiconductor equipment orders and service revenues both set records. Flash memory orders also set a record. Planar to 3D RAM transition is accelerating. Applied expects to grow market share significantly during this transition.

CVD orders were the highest ever. Etch orders were the second highest in 15 years.

Non-GAAP numbers: net income $410 million, up 13% sequentially from $362 million, and up 17% from $349 million year-earlier. EPS $0.33, up 14% sequentially from $0.29, and up 18% from $0.28 year-earlier. 43.9% gross margin.

The backlog was $3.10 billion, sequentially from $2.78 billion.

GAAP gross margin was 40.9%, operating margin was 15.9%. The lower margins of new products are presenting challenges.

Silicon Systems Group (SSG) segment sales were $1.64 billion, up sequentially from $1.56 billion and up from $1.48 billion year-earlier. New orders were a record $2.0 billion, up sequentially from $1.7 billion and up from $1.57 billion year-earlier. Of total orders, foundry was 32%, DRAM 18%, Flash 39%, and Logic & other 11%.

Applied Global Services (AGS) revenue was $665 million, up sequentially from $646 million and up from $567 million year-earlier. Orders were $561 million, down sequentially from 641 million, but up from $552 million year-earlier.

Display segment revenue was $151 million, down sequentially from $163 million, but up from $119 million year-earlier. Orders were $295 million. Believes about 1 in 5 smartphones shipped in 2015 will be OLED, but margins are tightening partly due to the weakness of the Yen.

Energy and Environmental Solutions (EES) [solar] revenue was $39 million, down from $103 million year-earlier. New orders were $29 million. Discontinued wafer saw and implant product lines.

Cash and equivalents (including long-term investments) balance ended at $3.70 billion, down sequentially from $4.17 billion. Cash flow from operating activities was $334 million. Capital expenditures were $51 million. $123 million was used for cash dividends. Long-term debt was $1.55 billion. $625 million was used to repurchase stock in the quarter. Non-cash share-based compensation was $46 million.

Cost of goods sold was $1.47 billion, leaving gross margin of $1.02 billion. Operating expenses of $622 million consisted of: research and development $372 million; selling and marketing, $112 million; general and administrative $135 million. Leaving income from operations of $396 million. Interest and other expense net $21 million. Income tax $46 million.

New etch chamber product is ramping rapidly. Olympia ALD tool is also doing well for 10 nm devices.

Will continue to be opportunistic with stock buybacks.


Order trend for October details? We had strong orders in fiscal Q3, so you might ask why revenues are not predicted to be stronger in Q4. A fair number of orders are from Japan where we recognize revenue a quarter after we ship. The high end of Q3 backlog will sustain revenue into Q1. There is a lot of momentum in VNAND flash devices, which is good for Applied. It requires more deposition, etch, RTP, etc. than planar memory. The tool mix is different, so the re-use for us is less. Planar shrink was mainly re-use. It is about a 3x revenue opportunity for us. We are seeing softness in foundry due to equipment re-use, tool utilization, and yields. We are not pessimistic on foundry longer term, especially as we get to 10 nm in 2016.

We bought back stock aggressively this quarter because the pricing grid was set in advance to take advantage of the long-term value we see.

Foundry issues cyclical or secular or share loss? Some of it is the timing of our fiscal calendar vs. competitors. It is mostly about utilization of tools. So it appears to be cyclical. There is no share loss by us in foundry, and we are gaining share in memory.

3D Nand %? It is going up significantly in each quarter. Majority was 3D in the quarter.

In display we are selling more into the small screen sizes.

PVD, EPI, and inspection are higher margin products; etch is lower margin. In etch our competitors have similar to higher prices, so the issue is our costs, which we are working to lower.

What can you do to get your stock price up with peers? We have been positioning the company around the major inflections. We have the highest CVD orders ever, etc. We set ourselves to be in position when the new technologies ramp. We are winning in critical applications with higher prices than competitors. As 10 nm ramps we will be in a very strong position. These are tough inflections for our customers, who have to get to good yields fast.

WFE weakness in 2H, affect of view on 2016? Optimistic about memory, the slowness is in foundry. Our customers say 10 nm will be a good spend year in 2016. Capital intensity is going up each node. Then there is always the macro stuff and consumer spending.

Growth via acquisition? We are looking for the mix to come back to a normal relationship between foundry and memory. Acquisitions are driven by return on investment, and also needs to be a leadership position, and synergy with our core businesses. The attractive opportunities are minimal today, except in materials engineering.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. What we put in these notes may not be what you would note.

Copyright 2015 William P. Meyers